Over the years I have written many columns on real estate fraud. Though this subject matter is not as timely now as it was during the early 1980’s and again in the early 1990’s, I wish to discuss this area of fraud that, hopefully, you will never be faced with. In the event that this situation never befalls you, please remember this advice for friends or relatives who may not be as fortunate.

Picture the following two examples:

(1) A widow buys a condominium in 1989-1991 for $176,000. She puts 10% down and XYZ Bank makes a first trust deed in the amount of $158,500. The widow moves in and moves out a year later due to a job transfer. She is lucky and rents the apartment for $1,500 a month. There is a negative cash flow of $200 a month. Unfortunately, by 1993 the property was only worth $145,000. With high credit card debt, the widow was having trouble keeping up with the mortgage payments.

(2) A couple has owned a four unit building for years. In 1989 they refinance it based on an appraisal of $250,000. They currently owe $200,000. By 1993 the property was only worth $170,000. The couple cannot pay the real estate taxes and can barely make the first trust deed payments.

Unfortunately, both of the above referenced examples were very, very common in the mid 1990’s. Things became so bad that an entire industry developed specifically designed to take advantage of and defraud the type of people outlined above. Radio commercials and newspaper ads started claiming, "Behind in payments? Contact us. We will take the property off your hands, deal with your lender and your worries are over." The pitch was good and these desperate people made the phone calls. Just imagine being a neophyte in that situation and having a big company solve your problems. All companies seem big when they are on the local radio stations and have large ads in large newspapers. I purposely used rental property in the above example, but a single family residence or any type of property would fall into the same scam. Actually, there are two similar scams; let me give you both.

Scam #1:   If the property were a single family residence, the pitch would go something like, "Will assist you in transferring your property to us. Your property is now ‘upside down’ and we know you can no longer afford to keep it. Once we get the property we will contact your lender and ‘work out’ a deal with them to reduce the amount owed and save the property. This will solve your payment problems and potential IRS problems. Oh, by the way, our charge for arranging all this is $3,000. Believe me, this takes a lot of work."

Scam #2: Usually the same pitch and smaller fee or no fee. The "buyer" would arrange a deed from victim to scammer and then ask for a transfer of any security deposit(s) that the tenant(s) have put up. This scam is the worst, because $1,500 to $2,000 is transferred to scam buyer on the condominium and perhaps $2,000 to $3,000 of securities on the four unit building.

After transfer of scam #1 property, the buyer may or may not contact the lender and say, "I am now the owner. You are owed $158,500. If you will reduce your balance to $120,000 (less than property value) I will continue to make payments."  In most cases the buyer didn’t even contact the lender because they had already received their fee of $2,000-$3,000.

In the case of income property, the scam gets really nasty. The scam artist now has security deposits for all the tenants and collects rents on all four units on the first day of the following month. The scam artist does NOT pay the first trust deed. On the first of the following month the scam artist collects another four rents from the tenants (he is the legal owner) and again fails to make payments to the first trust deed holder. By now the first trust deed holder is making foreclosure noises. By the first of the following month the scam artist collects another four rent payments,. By now the first trust deed holder has filed a Notice of Default, a four month process. Do you get my drift now? Another three or four months rent is collected by the scam artist during the foreclosure. If this were a larger building (8 units plus), a sharp lender would have placed a court appointed receiver to avoid further rent skimming. In this case, the scam artist would have only collected security deposits and one month or two of rent ON A LARGE BUILDING.

The main thing is, in the above example, the victim (previous owner) was trying to avoid negative cash flow and foreclosure. What the victim got was foreclosure and IRS problems (relief of debt). More importantly, the victim could have collected the rents themselves. Though I am not suggesting that an owner ever collect rents, pocket the money and not pay the trust deed holders, I am suggesting it would be totally foolish to turn the property over to Mr. Suede Shoes, who will do just that.

If, though hopefully not, you or a friend or relative are ever faced with a situation like this, remember this article and run, don’t walk, to the nearest real estate attorney. Hopefully this whole area will just be interesting cocktail party type real estate knowledge.

Peter Rosenthal
VIP Trust Deed Company